Efforts to improve financial literacy have seen a corresponding increase in awareness. However mutual fund investors are choosy about the product they buy.

Investors are more frequently choosing mutual funds based on performance rather than by asset management company (AMC).

Returns and risk are still the biggest barriers to mutual fund penetration among Indian consumers.

Money is a powerful motivator, and much like their counterparts around the globe, Indian consumers are steadily increasing their appetites for saving and investing. Liberalization has transformed the market from a state dominated, structured playing field to one where private players are also making their presence felt. As a result, consumers have a dazzling buffet of financial options, but recent research shows that the Indian consumer prefers to stick to the tried and tested.

Mutual funds are currently not the first choice for investors. With only 9% of urban Indian households investing in them, mutual funds present a huge opportunity for financial institutions. Efforts to position mutual funds as a tax saving option have received an additional boost with the finance minister raising the ceiling on these investments.

So Who Is Buying Mutual Funds?

Not surprisingly, consumers in the metro areas are leading the slow and steady growth of mutual funds in India. In the past three years, consumer investment in mutual funds has increased 5% in the metro areas. Growth in non-metros has been respectable, increasing 2 percent since 2010. In looking at who is investing, the recent study findings show that investing in mutual funds is more often driven by consumer age than gender. For example, the survey found high growth among respondents 30 years of age and older. Comparatively, penetration is low among youth.

Affluence is another factor. Nielsen survey results indicate that middle-to high-income individuals tend to invest in mutual funds. More than 50 percent of respondents with lower incomes said they have never invested and do not intend to invest in mutual funds. Typically, these non-investors tend to believe in saving their money rather than growing it.

Financial Literacy Is The Biggest Barrier To Entry

The biggest challenge that financial institutions and companies face with regard to engaging investors is the low level of financial literacy among Indian consumers, which leads the average investor to view options like mutual funds with suspicion and caution.

The Securities Exchange Board of India (SEBI) recognized this issue and took action by mandating that all mutual fund companies set aside a portion of their revenue for investor education and awareness initiatives. Companies have also stepped in to help educate. In 2012- 2013, for example, various asset management companies (AMCs) organized a number of mass media campaigns centred around investor questions.

Our studies indicate that the investment of time and effort is beginning to pay off. While financial literacy is still low, investors are showing increased familiarity and comfort with the basics of mutual fund investment. They are more aware of terminology and understand the risks better.

The Best Customer Is The Informed Customer

Increasing consumer financial literacy may be a long-term project but it is already yielding dividends. As consumer engagement increases, dependency on the independent financial advisor (IFA) is gradually decreasing. While banks continue to be the main source of information, investors are exploring other avenues of information. In keeping with the global trend of consumers seeking investment advice online, Indian consumers too are turning to the Internet for advice on mutual funds.

Increased awareness has also changed investment patterns. Consumers no longer make their choice on the basis of brand name. Instead, they are becoming more discerning about the products offered and their suitability to their own investment needs. IFAs and regional managers, usually the points of contact for the consumers, would benefit from increased training to enable them to better address these needs.

Winning Over The Indian Investors

The Nielsen survey reveals that investors choose a mutual fund scheme on the basis of its track record. The second criteria is the track record of the AMC (growth in AUM (Asset Under Management) as well as returns of all the funds), while the third is the recommendation of sales agents. Compared to 2012, the track record of the AMC gained more focus, moving up from the seventh place to the second spot in the survey.

The biggest battle that mutual fund companies have on their hands is that of perception. Mutual funds are not well received because consumers do not perceive them as high-performance investments. Positioning them as a safe way to invest in the stock market and highlighting past performance are key ways to shift those perceptions.

Television ads, especially those highlighting performance and historic performance of AMC would be a good way to reach consumers.

Besides, objective or need-based communication would help in increasing category penetration.